[Chart courtesy of MarketWatch.com]
European uncertainty continues to hang over us, but that didn’t stop major market ETFs from trending up as the S&P 500 rose 0.83%. However, the Euro is still at $1.31/Euro, indicating that risk perception remains high.
In the U.S., the bleak unemployment picture seemed to hit a bright spot. Unemployment claims this past week hit their lowest level in 3 ½ years. While this is positive, we need to see a steep drop in the unemployment rate to have any faith that we’re on a path toward recovery.
And although Congress can’t agree on how to cut the deficit, the House has finally given in to allow a payroll tax cut extension. This might help small businesses especially, but will have a minimal positive dent on markets at best.
In Italy, the Senate passage of the $40 billion austerity package is considered to be a move in the right direction, although it will come at a great cost to not only the country’s growth but also the well being of its citizens. Plus, in my mind, I can simply not see how austerity with reduced growth can reduce Italy’s debt load in the long term.
On the east end of club Med, Greece is facing even more hurdles. The IMF has asked Greek bondholders to take greater losses, but they are refusing. The current conditions on the next bailout package, amounting to $170 billion, include creditors taking a 50% haircut on almost $270 billion in bonds.
If Greek creditors don’t accept the haircut conditions, Greece’s debt-to-GDP ratio will balloon to 200% next year. At this point, I’m surprised Greece hasn’t thrown in the towel and opted for orderly default.
In the midst of all this, an ECB policymaker has called for quantitative easing in the Eurozone to prevent deflation. The Eurozone’s high debt is already bad enough, but the prospect of debt deflation, which would increase the debt burden in real terms, is even worse.
Some parties like the Germans have made it clear that they aren’t exactly a big fan of easing measures. Regardless, quantitative easing might be necessary anyways to at least help bring sovereign bond yields down and improve overall economic conditions.
I don’t expect much action tomorrow with Christmas coming this weekend. While volatility may not be significant through the end of the year, preparing yourself for the beginning of next year is the key right now. As I’ve stressed, I believe a sizeable chunk in bond ETFs and cash along with a few well performing sector ETFs is the best course of action for the time being.